Book contents
- Frontmatter
- Contents
- List of figures
- Preface
- Acknowledgements
- Section I The five financial building blocks
- Section II The three pillars of financial analysis
- Section III Three views of deeper and broader skills
- Appendices Individual work assignments: Suggested answers
- I Building block 1: Economic value
- II Building block 2: Financial markets
- III Building block 3: Understanding accounts
- IV Building block 4: Planning and control
- V Building block 5: Risk
- Glossary
- Bibliography
- Index
I - Building block 1: Economic value
Published online by Cambridge University Press: 22 January 2010
- Frontmatter
- Contents
- List of figures
- Preface
- Acknowledgements
- Section I The five financial building blocks
- Section II The three pillars of financial analysis
- Section III Three views of deeper and broader skills
- Appendices Individual work assignments: Suggested answers
- I Building block 1: Economic value
- II Building block 2: Financial markets
- III Building block 3: Understanding accounts
- IV Building block 4: Planning and control
- V Building block 5: Risk
- Glossary
- Bibliography
- Index
Summary
1. If your CoC is 10%, what is the present value of $100 in one year's time?
100 ÷ 1.1 = 90.9
2. By how much would this change if your CoC was (a) 5% and (b) 15%?
100 ÷ 1.05 = 95.2 – an increase in value of $4.3m
100 ÷ 1.15 = 87.0 – a decrease in value of $3.9m
Note that although we changed the CoC by ±5% the change in value was not symmetrical.
3. What is the present value of $100 in ten years' time if your CoC was (a) 5%, (b) 10% or (c) 15%?
Discount factors for ten years' time are:
5% CoC Discount factor = 0.614 so present value is 61.4
10% CoC Discount factor = 0.386 so present value is 38.6
15% CoC Discount factor = 0.247 so present value is 24.7
4. An investment offers the potential to earn $10 per annum for the next five years with the first cash flow being in one year's time. If your CoC is 12% what is the maximum amount you should be prepared to pay for the investment?
Discount factors for years 1-5 are: 0.893 0.797 0.712 0.636 0.567
So present value of cash flows is $10m times the sum of these = 36.05
This is the maximum you should be prepared to pay unless there are any other factors to consider that are not mentioned in the question.
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- Sources of ValueA Practical Guide to the Art and Science of Valuation, pp. 571 - 573Publisher: Cambridge University PressPrint publication year: 2009